Federal Medicaid Opt-Out Effect on Hospitals

The mandatory expansion of Medicaid was an important element of the Affordable Care Act as providing health care benefits to uninsured was intended to achieve equity. The expansion of Medicaid rolls was also intended to reduce the cost of providing care for the uninsured and the need for disproportionate share hospital funding, which is an adjustment to account for the needs of hospitals serving a large number of low-income patients. With the ability to opt out of the Affordable Care Act’s expansion of Medicaid eligibility (read more: The Federal Medicaid Apple: Poison or the Cure?), the opt-out states may create financial problems for hospitals that depend on disproportionate share payments to cover part of their costs for providing non-reimbursed services to the indigent and uninsured. The Affordable Care Act’s decrease in disproportionate share payments to hospitals is not changed by the Supreme Court’s ruling.

Generally, those hospitals serving the largest numbers of uninsured and Medicaid patients are organized as non-profit organizations that qualify for tax exempt status under IRC Section 501(c)(3). The Affordable Care Act creates new requirements for these hospitals. These new requirements mandate that a hospital conduct a community health needs assessment to assure that it is serving the needs of the community. Hospitals will also be required to adopt an implementation strategy to meet the identified health needs. In addition, non-profit hospitals must adopt a financial assistance policy and an emergency care policy. Coupled with more scrutiny of non-profit hospitals to implement equitable financial assistance policies for the indigent and to justify their non-profit status by demonstrating that non-profit hospitals are meeting the needs of the community, non-profit tax exempt charitable hospitals may suffer if states opt out of the expansion and these hospitals lose disproportionate share payments. Both Medicare and Medicaid disproportionate payments will be reduced starting in 2014. The penalty for not conducting a community needs assessment and having financial assistance plans in place that meet the Affordable Care Act’s requirements can result in a disqualification for IRC 501(c) (3) tax-exempt status are also effective in 2014.

With the increased focus on whether 501(c) (3) hospitals are meeting the needs of their communities, opting out of the Medicaid expansion, when coupled with decreasing payments for serving the uninsured and Medicaid populations, may mean even more difficult financial times for non-profit hospitals and their organizations.

Lisa English Hinkle is a Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC. Ms. Hinkle concentrates her practice area in health care law and is located in the firm’s Lexington office. She can be reached at lhinkle@mmlk.com or at (859) 231-8780.

This article is intended as a summary of federal and state law and does not constitute legal advice.